- Dynamic debt runs: evidence from a structural estimation
- Number of pages
- Amsterdam: Universiteit van Amsterdam
- Document type
- Working paper
- Faculty of Economics and Business (FEB)
- Amsterdam Business School Research Institute (ABS-RI)
We use data from the 2007 asset-backed commercial paper (ABCP) crisis to estimate a dynamic model of debt runs. The model features long-term investment financed with dispersedly held, short-term debt with staggered maturities. Yields change endogenously over time, which introduces dilution risk: lenders demand high yields to compensate them for being diluted by future lenders, which makes runs more likely. This model of fundamental-driven runs fits several features of the data, including the ten-fold increase in yield spreads leading up to runs, the high probability of recovering from a run, the positive relation between yield spreads and future runs, and the positive relation between yield levels and yield volatility. We measure the e¤ectiveness of several policy interventions designed to prevent runs and find that interventions targeting asset liquidity and conduit leverage are most e¤ective.
- November 17, 2011
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